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Refund rip-off: IRS losing billions on Tax Day

Tax-Day fraud is now one of the fastest-growing crimes in America, and the IRS can't keep up

Nina Parton didn’t know why a couple guys would kill her father on his daily mail route.

Bruce Parton had been doing the same route for 10 years, and knew everyone in the Miami suburb. Then, in December 2010, he was shot twice and died on the spot. Only when the police arrested the murderers four months later did Nina Parton learn that the attack was part of a plot. The two young guys had been cruising the neighborhood looking for a mailman, hoping to steal a mailbox master key, and then use the residents’ identities to file tax returns in their names.

“It would be less expensive for them that way,” Nina Parton told America Tonight. “My dad was 60 years old and something like 5-foot-5,” she added — easy prey.

Identity theft is America’s fastest-growing crime, and tax-return fraud has become one of its most dynamic subsets. Criminals are leaving street corners for living rooms, and trading drugs for laptops, lured by the promise of more money for less hustle. According to the IRS, indictments and sentencing for tax-return fraud doubled last year, and the agency has described identity theft as the number one tax scam of 2014.

Prospective tax thieves need just three things: your name, Social Security number and birth date. (Those personal records are cheaply available on the black market.) They can then electronically file thousands of false tax returns with made-up numbers for your income and deductions. Within a couple of weeks, your refund is in the swindler’s pocket -- possibly spent on cars and other luxury items, before you even file your taxes.

The IRS does not have third-party information to effectively verify your income when tax returns are processed. So when a thief gets a fraudulent refund, the burden is on the victims to prove to the IRS that they are the legitimate taxpayers.

To collect the stolen tax returns, thieves often use prepaid debit cards, which can be bought in regular corner stores, require no bank account and allow money to be laundered quickly and easily. That way, they don’t have to bother with banks or check-cashing stores that may become suspicious when one person brings in several tax-refund checks. Several detectives have reported pulling over drivers and finding stacks of prepaid cards, along with stolen identity data.

The Mecca of identity theft

Manuel Balce Ceneta/AP

Florida has the highest rate of tax return fraud in the country, according to the Treasury Inspector General for Tax Administration (TIGTA), and Miami and Tampa are the scam capitals. Last week, the Tampa field office conducted seven indictments or arrests in tax return fraud cases, while the Miami office led 23. In 2012, the most recent year data is available, around 38,000 potential fraudulent tax returns were filed in Miami alone, totaling nearly $150 million in refunds.

But who’s doing this? In a statement released ahead of the April 15 tax filing deadline, Attorney General Eric Holder said the scams "are carried out by a variety of actors, from greedy tax return preparers to identity brokers who profit from the sale of personal information to gangs and drug rings looking for easy access to cash."

As of September 2013, the IRS had identified more than 2.5 million cases of identity theft, according to a February report from TIGTA. Even Holder isn’t immune. Last year, two men pleaded guilty in Georgia to trying to get a tax refund by using his personal information.

Since 2011, the agency said it has stopped 15 million suspicious returns and avoided sending out $50 billion in bogus refunds. But, despite control measures, the IRS has refunded $4 billion to identity thieves for the 2012 fiscal year, according to The Associated Press.

An overwhelmed IRS

Susan Walsh/AP

The IRS is amping up efforts to control the problem. The agency assigned more than 3,000 employees to work solely on fraud and help victims and it’s training more than 35,000 workers to help taxpayers spot red flags.

And there are some concrete results. The IRS said it initiated more than 1,500 criminal investigations related to identity theft in fiscal year 2013, a 66 percent increase from the previous year. And it’s more than halved the case resolution timeframe from 312 days to 120.

“We certainly understand this is still frustrating for the victim,” the IRS said in a statement to America Tonight, “but these are among our most complex cases, and we need to make sure we confirm the identity of the correct taxpayer.”

Another indication of the scope of problem: the IRS has given more than one million taxpayers an identity protection PIN number to be submit with their tax returns. All these taxpayers have previously been the targets of identity theft.

He got the Social Security Number of a guy who was mentally challenged and made $12,000 with it.

Gilbert Rodriguez

Convicted thief and anti-tax fraud activist

In 2012, Wifredo Ferrer, U.S. attorney for the Southern District of Florida, formed a special task force to attack the tax-fraud “epidemic.” The Tampa Bay Identity Theft Alliance includes Tampa Bay federal, state and local law enforcers who have stepped up to investigate identity theft and fraud. The program had a victory in November 2013, when a federal audit showed that Miami replaced Tampa as the IRS-duping capital.

Although initiatives such as the Tampa Bay ID Theft Alliance are helping to soften criticism of the IRS, the Treasury Inspector General for Tax Administration reports that the impact of identity theft on tax administration continues to be significantly greater than the amount the IRS detects and prevents.

A cash cow for prisoners

While tax-return fraud has skyrocketed across the country, its growth has been particularly explosive in prisons. TIGTA reports that the number of fraudulent tax returns filed from prisons increased from more than 18,000 tax returns in 2004 to more than 186,000 tax returns in 2011 – a tenfold leap. The refunds claimed on these tax returns increased from $68 million to $3.7 billion.

Gilbert Rodriguez, 62, served about 20 years in state prison for a long list of fraud and theft charges. He admitted to America Tonightthat he’s“no saint” when it comes to the law, but he’s frustrated with the IRS. He said he’s witnessed how inmates are making money by filing fraudulent tax returns.

“He got the Social Security Number of a guy who was mentally challenged and made $12,000 with it,” Rodriguez remembered. “He turned around and gave the kid $10. When I found out about it, it pissed me off. So I decided to go look at it further.”

Rodriguez said tax fraud was rampant in the state prisons where he served his sentence, and he tried for years to tell the federal government what was going on. He knew how the criminals were getting away with tax fraud and how the IRS could prevent the scams. And at the time, he hoped authorities would give him credit and an earlier release for the information. But now ending prisoner tax fraud has become a personal campaign for Rodriguez, and point of honor.

Inmates file for fraudulent returns using each other’s Social Security numbers and information from family members and friends, he said. They usually know an inmate at the prison library who can make photocopies, seal mail for them and send them out. The refunds help the inmates, most of whom are serving life sentences, improve their living conditions in prison. If they’re caught, they were moved to a different facility, explained Rodriguez, where before long, they’d do it again.

“Something could have been done long ago,” he said. “[The authorities] could stop it, but they don’t want to stop it. They want the media to think they’re working on it, but they are not to this day.”

Rodriguez said he never participated in a fraud but offered his Social Security number to another inmate before notifying the IRS. He thought they would be able to track his number and understand the scheme. But the IRS, he said, never got back to him.

Forgiving a broken system

Bruce Parton with his daughter Nina PartonCourtesy of Nina Parton

Nina Parton didn’t attend the trial of her father’s assailants. She said she didn’t think she could make it to the end. The two men were sent to federal prison: Pikerson Mentor was sentenced to life in January 2013. Saubnet Politesse, his accomplice, got 21 years behind bars.

Parton is still grieving the loss. She said her father never lived to fulfill his retirement plan of moving back to a quiet life in the Catskill Mountains of New York.

“I know that part of what we are asked to do is to forgive,” she said. “Someday, I feel forgiveness, but other days, it’s more difficult.”

When she was given the opportunity to talk to Mentor and Politesse before they were sent to prison, she told them about her father and how he will be missed.

“There’s so much opportunity in this neighborhood,” she said. “Their families have given up a lot to be able to be here. They could have had such a different life.”

She added: “But what can we do once you go down the wrong path? It’s a waste of my father’s life; it’s a waste of these young lives.”